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Legal Procurement: Sourcing is a Team Sport

Wednesday, August 29, 2012

By Dr. Silvia Hodges, TyMetrix  

I recently participated in a roundtable on purchasing legal services. When I brought up Procurement, a lawyer, let’s call her Marge, was quick to shut me down. She explained that as long as the legal department does a good job managing for value, the legal department will continue to select lawyers without the involvement of Procurement. “They are just not able to do it,” she insisted. “They don’t know what they’re talking about. This is the law, not widgets.”

Marge’s view that Procurement can be prevented from sourcing legal services might still ring true for small and medium-sized companies; at least for now. However, the interim results of a study I am working on about the influence of Procurement on the purchasing of legal services (release in fall 2012), tells a different story. Evidence suggests Procurement is already heavily involved in sourcing legal services in large corporations, particularly in Fortune 100 companies.

Historically, Procurement focused on the purchasing of raw materials, production items as well as maintenance, repair and operations supplies. In the last decades Procurement made inroads in professional services, including accounting, engineering, information technology, and consulting. Each of the professions protested loudly that Procurement had no business getting involved in sourcing their services. While all professions like to believe they are different, Cyndi Joiner, Managing Director of Alvarez & Marsal says in her article Be Smart When Sourcing Legal…1 that “the myth that legal is different is just that, a myth.” In any case, Procurement got a grip on the different categories, changed the sourcing approach ― and is still sourcing these services now. It is unrealistic to assume it would be different for the legal sector.

There is no doubt that the economic crisis forced companies to scrutinize costs in ways they have never experienced before. Until recently, the legal department was considered sacred, the last holdout allowed to source without the involvement of Procurement. The legal department’s exemption did not go unnoticed. “[Procurement and] supply management groups have long eyed this category, noting its high degree of spending and lack of transparency,” notes Jason Winmill, Partner at Argopoint, in his article Working with In-House Lawyers: A Significant Sourcing Opportunity.2

However, from today’s management point of view, legal departments are cost centers and need to be managed as such. In an effort to rein in cost, general counsel consolidated the number of firms their company regularly works with, negotiated discounts and froze rates, and demanded fixed fees or caps or other alternative fee arrangements. They introduced project management, started outsourcing, and hired legal operations professionals to monitor legal spend. However, legal is still a very large area of spend for many companies, so further budget cuts are unavoidable.

“Three years of cost-cutting has created a new dynamic in the relationship between law firms and their clients,” found Financial Timesresearch report A New Dawn: Lessons for Law Firm Management in the Post-crisis World.3Rather than maintaining a cozy relationship with law firms on an ongoing basis, more and more companies are taking a rigorous approach to selecting firms and ensuring that the relationship continues to deliver expected outcomes. This is where Procurement comes in. However, most legal departments have traditionally resisted working with Procurement.

Procurement increasingly pushes back and reminds that they have a top management mandate to find savings. Procurement is also involved in the purchasing of legal services to negotiate more efficiently, measure best value, and provide more objective comparisons. They are “buyers” in the classic sense: they are responsible for the engagement letter/retainer or framework agreement and negotiations. Procurement professionals are influencers; they try to affect the outcome decisions with their opinion. Additionally, Procurement professionals also act as gatekeepers for the legal category — they help manage and direct the flow of information between the service provider and client.

When effectively using Procurement, legal departments do not simply hand over all power to their Procurement colleagues. Findings from my interim research indicate that Procurement is rarely the final decision maker. Selecting law firms is still the legal department’s prerogative. Rather, Procurement is mainly responsible managing the sourcing process; for negotiation and contract development; pre-purchase evaluation of legal services providers (which may or may not be traditional law firms); as well as developing sourcing criteria and purchasing strategies. “Effective legal [procurement] sourcing initiatives create ways to articulate and define the specific legal expertise needed, and then objectively assess which outside counsel has that expertise. Initially, these definitions of expertise and legal skill only reside in the minds of the in-house counsel. But a robust sourcing approach will ensure that the specific needs are formally articulated,” notes Winmill. What’s more, Procurement professionals are involved not only in purchasing routine services and legal “commodities,” but also in complex and high value legal services. This means, that there is not a lot left in which Procurement isnotinvolved. Exceptions may be emergency situations, where Procurement’s timeframe does not fit.

OVERCOMING TENSION – SOURCING IS A TEAM SPORT

As expense pressures have grown in the last few years, and Procurement professionals have developed more experience sourcing professional services, Danny Ertel, Founder of Vantage Partners has noticed some general counsel welcome Procurement’s advice and support.4

Forward-thinking general counsel like Dan Troy of GSK turn to Procurement for help, and it pays off: “In the nearly four years since GlaxoSmithKline looked to revamp the way it hires and pays for outside legal services, the pharmaceutical giant has saved tens of millions of dollars in legal fees,”5 according toThe Legal Intelligencer.

Joiner insists on collaboration between the legal department and Procurement, as well as the preferred legal service providers. She warns: “Do not attempt this project in a silo because you will fail.” A great opportunity for collaboration between the legal department and Procurement is exploring whether legal services can be ‘unbundled’ and whether some activities traditionally carried out by counsel should be outsourced to non-traditional law firms or legal process outsourcing (LPO) providers. In his blog post on E-Sourcing Forum, Sourcing Legal Services Gaining Momentum,6 David Bush, CEO of IASTA, advises in-house counsel and Procurement to work together to balance the company’s cost-cutting needs with their preferences for outside counsel. “General counsel should look for ways to quantify legal services that will steer the procurement department toward measuring results, not just costs.” This can be achieved by benchmarking costs, comparing savings in the industry in general or looking at outside counsel savings affected by better practices or better technology. Reverse e-auctions and e-billing are additional ways to help cut costs for the company while maintaining the level of service to which the legal department is accustomed.

Governmental agencies have been using the so-called Two-Step Procurement Process for competitive contracting since the 1950s. This process combines sealed bidding and negotiation. Typically, Procurement sends out a request for proposals (RFP), describing the client’s requirements. After Procurement receives and evaluates the proposals, Procurement asks the firms whose offers they found acceptable to submit their price proposals based on their initial terms. Only then will Procurement conduct negotiations with the parties, now comparing “apples to apples,” leading to the award of a contract to the lowest responsive offer. Procurement “has many very sophisticated methods of analyzing bids to make valid comparisons. If a company is large enough to have sourcing possibilities in legal services, they have surely heard of RFPs or eRFx technology (and probably use them),” says Bush. “These concepts are easily accounted for by asking the questions and assigning the proper measurements. Weighing price and non-price factors are methods that have been used by sourcing teams for a long time.” Ken Bunge in Procurement 101: The Two-Step Process explains that the “good news for in-house counsel is that in using this model for acquiring legal services, one is not bound by the rigid regulatory requirements attendant to the government process. Therefore, in establishing the ‘rules’ for a solicitation, you will have wide discretion to tailor your approach.”7

Ertel, however, warns that sourcing legal services “requires a significant degree of trust between lawyer and client, something that does not easily come as a result of an online auction.” Legal services are, after all, expertise- and judgment-based services, not fungible commodities. Joiner believes that the secret for success is to understand the requirements, dependencies, cost structure and the environment in which the services are used ― Procurement professionals have been doing this for other complex spend categories in the past. “Due to the fact that many organizations have chosen to informally outsource a large percentage of their legal counsel, the dependency on outside counsel has become increasingly important. However, like all significant outsourcing relationships, a formal process should be developed to effectively and efficiently manage these key relationships.” My research indicates that for Procurement, services excellence, expertise with similar matters, value for money, and fee arrangement flexibility are the most critical factors when deciding which legal service providers to select. Interestingly, “lowest price” was the secondleastimportant factor for the participants in the study.

HOMEWORK FOR PROCUREMENT

Before meeting with the general counsel, Procurement professionals need to do their homework to understand the landscape, get smart on the subject matter, and develop an approach for selling their value proposition. “Attorneys will be put off by standard [procurement and] supply management terms and concepts. Find ways to learn their language and to ‘translate’ sourcing ideas into their context and vernacular. Sourcing ideas aren’t the issue — it’s the way sourcing talks,” explains Winmill.“[Procurement and]supply management professionals who have succeeded in legal don’t quit — they persevere.”

As just one example, Procurement must understand if the firms serve a unique geography or mostly operate in a Tier 1 market. This can make a big difference according to the Real Rate Report’s8 regression model. Based on actually paid data, the model says that the location of a lawyer in a Tier 1 market, such as New York, Washington DC etc. raises the hourly rate of a lawyer by $161. “One’s initial reaction might be to think ‘let’s just move work outside of NY and we’ll save money.’ The reality is, you need to first understand why the work is being done there and what value is offered. It may be worth the additional cost. Only after understanding that can you make a positive impact on the sourcing of legal services,” says Craig Raeburn, Managing Director of TyMetrix Legal Analytics. Joiner also recommends finding out whether particular firms handling sensitive matters should be eliminated from the process and what relative complexity of work the firms typically do – commodity, standard, or specialized work. Ertel emphasizes the importance of unbundling activities that have traditionally been treated as single matters or services and determining how to move some tasks to other providers creates different risks to manage, ranging from scope definition and provider selection to the impact on the relationship with lead outside counsel. Procurement needs to adapt its methodologies to what is unique about the legal industry, he says.

Developing a preliminary negotiation strategy often includes a preferred provider program, hourly rate structure per timekeeper, per type of practice, per region, volume price agreement (VPA), rebates, payment terms, and agreement internal billing guidelines. A well-designed, fact-based approach for reviewing legal spend can be very beneficial to an organization, according to Joiner. Corporations will benefit from optimizing the number of firms used, their ability to leverage spend across the business, standardized rates, documented processes for engaging preferred firms for service, improved billing guidelines for invoice audit accuracy and complete transparency and visibility into all legal spend. A sound sourcing strategy that includes developing, implementing, monitoring, and continuous improving can produce sustainable savings averaging of 7 to 10 percent, and in some cases, significantly more. Standard practices of corporations today include billing guidelines, case management guidelines, matter evaluation process, and invoice review process. The majority of organizations also generate key performance indicator (KPI) reports. Law firms need to understand which KPI Procurement measures and deliver on these.

PREPARING FOR SUCCESS

The growing involvement of Procurement has not been easy for law firms. They are now confronted with a new, additional set of buyers. Howard Kravitz of PwC calls Procurement the “new sheriff in town.”9 These new sheriffs often start out with a lot of tire kicking, such as sending out RFPs. Ertel recommends that legal service providers learn to qualify opportunities more carefully than before and become choosier about whether and how they respond to avoid wasting time and resources. A misguided service mentality of marketing and business development would be to help partners with every RFP that lands on their desks. Not every RFP should receive the same level of attention. Firms are advised to develop standards and processes for guidance that are based on the firm’s strategy. The firm needs to have a clear understanding of when they draw the line or when an “opportunity” is not one that they should be interested in.

Kravitz suggest speaking directly with the client to learn more about how Procurement works in their organization, what influence Procurement has, and how the two departments collaborate. At some point, says Kravitz, you will need to approach Procurement. “In these instances, consider the value to them of building a relationship with you. As a key stakeholder with growing influence, most procurement officers are open to learning more about what services you currently provide and those you may be able to provide in the future. They may be looking for ways to consolidate spend, or to increase spend with the goal of getting volume discounts.” Kravitz advises firms to do their homework, ask thoughtful questions about Procurement’s goals, objectives, challenges, and strategies. “Be prepared to share insight on key issues you believe may be facing the company, particularly those that align with the topics any good procurement officer is worried about. These include driving down costs, improving efficiency, speeding up the buying process, making sure vendors deliver on their promise, and maintaining integrity in the decision making process.”

While there may be Procurement professionals with limited understanding of and experience with the legal market, blatant ignorance of the category appears to be more polemical rather than a reflection of reality. Bush criticizes the perception that procurement is incapable of understanding legal services, unable to differentiate between a straightforward legal task that could be performed by most corporate lawyers and one that requires involvement by a trusted legal adviser or a subject expert.

For what it’s worth, according to the research’s interim findings, a good portion of legal procurement professionals has a legal qualification (JD) ― Marge might be surprised to learn. That is not to say that Procurement professionals have to hold a JD to be able to successfully apply their sourcing skills and adapt their tools to complex services like the law. Many Procurement professionals are MBAs or hold undergraduate business or finance degrees. “What in-house departments can benefit from is appropriate business perspective,” notes Winmill. No matter what their background, one way to make sure you stay focused on them is to ask about their goals and how they are measured. This is key information that can help you shape your approach going forward.

Dr. Silvia Hodges helps law firms and legal departments become more efficient and effective. She focuses on data-aided decision-making and client purchasing decisions, in particular the influence of procurement on the purchasing of legal services. She regularly researches, speaks, and publishes in the US and internationally. Silvia is the Director of Research Services of TyMetrix Legal Analyticsand an Adjunct Professor at Fordham Law School in New York, where she has pioneered courses in law firm management and law firm marketing. She also leads groups of legal procurement/sourcing managers and of legal operations managers. Silvia can be reached athodges@silviahodges.com  

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